Voices: Why PERA's presumptions are faulty

Joshua Sharf, of the Independence Institute, offers a counterpoint to an earlier EdNews Voices post by PERA Executive Director Gregory Smith in which Smith defends Colorado’s public retirement system.

Did you recognize the faulty presumptions in PERA’s spirited defense of defined benefit plans?

You have been given a false choice about why defined benefits plans are better than defined contribution plans.

In a recent EdNews ColoradoVoices column, Colorado PERA Executive Director Greg Smith avers that PERA’s existing defined benefit structure best serves both the teachers and the taxpayers of Colorado. He was responding to a report by the National Council on Teacher Quality that leads the reader to support reforms to move away from the existing scheme and toward a defined contribution plan. Smith’s claims are wrong about the advantages of defined benefit plans in general, and PERA’s actuarial soundness in particular.

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Smith cites a National Institute on Retirement Security (NIRS) report that claims three advantages for defined benefit plans over defined contribution plans:

Less error in the amount saved for retirement,

Less need to rebalance and re-allocate assets over time, and

Better returns, largely as a result of lower transaction costs.

Each advantage turns out not to be dependent on having a defined benefit plan, but on having a professionally-managed, aggregated plan. The same advantages would accrue to a similar defined contribution plan that was also aggregated and professionally-managed.

PERA already has such an option, PERA Plus. It’s organized as a three-part 457(b) / 401(k) / Defined Contribution option. Like any set of diversified retirement offerings, it includes a variety of funds with different investment goals. For our discussion, the most relevant set of funds are those with target retirement dates. PERA has nine of these, with target dates every five years from 2015 to 2055, and an Income Fund designed to provide current income for current retirees.

Over time, as the target date for each fund approaches, that individual fund reallocates its assets into more conservative investments, before maturing and merging into the Income Fund. While each individual fund “ages,” all the funds collectively are maintaining a proper average. Taken together, they continue to represent the aggregate ages and target retirement dates of the entire set of members, the very source of the first two alleged advantages. The third, that of lower transaction costs, is completely independent of how liabilities are calculated.

There is no inherent reason why the assets of a DB plan should earn a higher return than those of an identically-invested DC plan. The only mandatory difference is that the defined benefit plan beneficiary has a share only in the specific benefits to be paid – the fund’s liabilities. By comparison, the owner of a defined contribution plan has a property right in the assets. Therefore, while a defined contribution plan is, by definition, always fully-funded, a defined benefit plan may have to seek additional funding, or trim back on its promises, in order to remain so.

The danger of unrealistic promises

It is therefore imperative that the promises being made to future retirees be realistic. All the more so if the promised benefits are being used to attract and retain qualified or exceptional teachers. Unfortunately, it is far from certain that PERA can afford the promises it is making, given its current funding levels. Recent legislative reforms (Senate Bill 10-001 in particular), while welcome and substantial, simply do not close the gap.

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By PERA’s most recent published calculations, its unfunded liabilities remain at a staggering $26 billion, and its overall funded level is well below 60 percent, on a par with the chronically ill Illinois public pensions. In fact, a recent study by Barry Poulson suggests that PERA could be in the worst shape of any statewide plan in the country.

Let’s give credit where credit is due. PERA’s adoption of a 401(k)-like portability is indeed commendable. But if it’s designed to mimic the properties of a 401(k), it can hardly then provide an advantage over one.

While PERA is no longer “letting it ride,” as it did with its stock market investments of the late 90s, the 8 percent returns needed for a return to solvency come with risk. Even better-than-average returns during regular years won’t make up for prior losses in bad years, because funds must then catch up, while payments can’t be deferred.

What success SB1 does offer is predicated on both benefit reductions and payment increases. However, a court challenge to the limitation of COLAs to 2 percent has been upheld by a State Court of Appeals, and its future is uncertain at best. Should the lower courts find that limitation not to be justified, most of the immediate reduction in PERA’s unfunded liability will be wiped out.

On the contribution side, PERA plans to require supplemental increases, rising incrementally from 2 percent to 5.5 percent until 2018. School districts have been picking up the tab for these increases, rather than passing them on to the teachers themselves, as they are allowed to do. As a result, PERA now absorbs upwards of 15 percent of annual operating expenses in many large school districts, a number that is expected to rise to 20 percent as the existing plan increases for make-up contributions.

Disclosure of ties to lobbying group needed

It is also worth noting that the institute that issued the favorable DB article (NIRS) is the lobbying and public policy arm of the defined benefit public pensions, with a particularly close relationship with Colorado PERA. Smith sits on the board of directors of NIRS, as does Meredith Williams, PERA’s former executive director. Colorado PERA is both a charter member and in NIRS’s Visionary Circle, along with such other public plans as CalPERS and the Illinois Municipal Retirement Fund.

Inasmuch as NIRS is not an independent think tank, but instead is a creation of interested parties to the debate over public pensions, this relationship ought to have been disclosed.

While there is no doubt that total compensation is an important part of attracting and retaining effective teachers, those promises must be grounded in reality. Until realistic arguments are used, PERA will continue to fail not only its member teachers, but also the schools and parents it is intended to serve.

I’m a Bronx teacher, and I see up close what we all lose when undocumented students live with uncertainty

It was our high school’s first graduation ceremony. Students were laughing as they lined up in front of the auditorium, their families cheering them on as they entered. We were there to celebrate their accomplishments and their futures.

Next to each student’s name on the back of those 2013 graduation programs was the college the student planned to attend in the fall. Two names, however, had noticeable blanks next to them.

But I was especially proud of these two students, whom I’ll call Sofia and Isabella. These young women started high school as English learners and were diagnosed with learning disabilities. Despite these obstacles, I have never seen two students work so hard.

By the time they graduated, they had two of the highest grade point averages in their class. It would have made sense for them to be college-bound. But neither would go to college. Because of their undocumented status, they did not qualify for financial aid, and, without aid, they could not afford it.

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During this year’s State of the Union, I listened to President Trump’s nativist rhetoric and I thought of my students and the thousands of others in New York City who are undocumented. President Trump falsely portrayed them as gang members and killers. The truth is, they came to this country before they even understood politics and borders. They grew up in the U.S. They worked hard in school. In this case, they graduated with honors. They want to be doctors and teachers. Why won’t we let them?

Instead, as Trump works to repeal President Obama’s broader efforts to enfranchise these young people, their futures are plagued by uncertainty and fear. A Supreme Court move just last week means that young people enrolled in the Deferred Action for Childhood Arrivals program remain protected but in limbo.

While Trump and the Congress continue to struggle to find compromise on immigration, we have a unique opportunity here in New York State to help Dreamers. Recently, the Governor Cuomo proposed and the state Assembly passed New York’s DREAM Act, which would allow Sofia, Isabella, and their undocumented peers to access financial aid and pursue higher education on equal footing with their documented peers. Republicans in the New York State Senate, however, have refused to take up this bill, arguing that New York state has to prioritize the needs of American-born middle-class families.

This argument baffles me. In high school, Sofia worked hard to excel in math and science in order to become a radiologist. Isabella was so passionate about becoming a special education teacher that she spent her free periods volunteering with students with severe disabilities at the school co-located in our building.

These young people are Americans. True, they may not have been born here, but they have grown up here and seek to build their futures here. They are integral members of our communities.

By not passing the DREAM Act, it feels like lawmakers have decided that some of the young people that graduate from my school do not deserve the opportunity to achieve their dreams. I applaud the governor’s leadership, in partnership with the New York Assembly, to support Dreamers like Sofia and Isabella and I urge Senate Republicans to reconsider their opposition to the bill.

Today, Sofia and Isabella have been forced to find low-wage jobs, and our community and our state are the poorer for it.

Ilona Nanay is a 10th grade global history teacher and wellness coordinator at Mott Hall V in the Bronx. She is also a member of Educators for Excellence – New York.

I was an attorney representing school districts in contract talks. Here’s why I hope the Supreme Court doesn’t weaken teachers unions.

Many so-called education reformers argue that collective bargaining — and unions — are obstacles to real change in education. It’s common to hear assertions about how “restrictive” contracts and “recalcitrant” unions put adult interests over children’s.

The underlying message: if union power were minimized and collective bargaining rights weakened or eliminated, school leaders would be able to enact sweeping changes that could disrupt public education’s status quo.

Those that subscribe to this view are eagerly awaiting the Supreme Court’s decision in the case of Janus v. American Federation of State, County, and Municipal Employees. At issue is the constitutionality of “agency” or “fair share” fees — employee payroll deductions that go to local unions, meant to cover the costs of negotiating and implementing a bargaining agreement.

In states that permit agency fees (there are about 20), a teacher may decline to be part of a union but must still pay those fees. If the Supreme Court rules that those agency fees are unconstitutional, and many teachers do not voluntarily pay, local unions will be deprived of resources needed to negotiate and enforce bargaining agreements.

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Based on my experience as an attorney representing school districts in bargaining and contract issues, I have this to say to those hoping the Court will strike down these fees: be careful what you wish for.

Eliminating fair share fees (and trying to weaken unions) represents a misguided assumption about bargaining — that the process weakens school quality. To the contrary, strong relationships with unions, built through negotiations, can help create the conditions for student and school success. Indeed, in my experience, the best superintendents and school boards seized bargaining as an opportunity to advance their agenda, and engaged unions as partners whenever possible.

Why, and how, can this work? For one, the process of negotiations provides a forum for school leaders and teachers to hear one another’s concerns and goals. In my experience, this is most effective in districts that adopt “interest-based bargaining,” which encourages problem-solving as starting point for discussions as opposed to viewing bargaining as a zero-sum game.

Interest-based bargaining begins with both sides listing their major concerns and brainstorming solutions. The touchstone for a solution to be adopted in a bargaining agreement: Is the proposal in the best interests of children? This important question, if embedded in the process, forces both sides to carefully consider their shared mission.

For example, some districts I worked with paid teachers less than comparable neighboring districts did. It would have been unreasonable for unions to insist that their pay be increased enough to even that difference out, because that would mean reducing investments in other items of importance to children, like technology or infrastructure. At the same time, it would have been untenable for management to play “hard ball” and deny the problem, because to do so would likely lead to a disgruntled workforce.

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Instead, both sides were forced to “own” the issue and collaboratively craft plausible solutions. That made unions more agreeable to proposals that demonstrated some commitment by the district to addressing the issue of pay, and districts open to other things that they could provide without breaking the budget (like more early release days for professional development).

To be sure, many school administrators could get frustrated with the process of bargaining or having to consult the negotiated agreement when they want to make a change. Some districts would very much like to adopt an extended school day, for example, but they know that they must first consult and negotiate such an idea with the union.

Yet, in districts where school administrators had built a reservoir of goodwill through collective bargaining, disagreement does not come at the cost of operating schools efficiently. Both sides come to recognize that while they inevitably will disagree on some things, they can also seek agreement — and often do on high-stakes matters, like teacher evaluations.

How does this relate to the Supreme Court’s pending decision? Without fees from some teachers, unions may lack the resources to ensure that contract negotiations and enforcement are robust and done well. This could create a vicious cycle: teachers who voluntarily pay fees for bargaining in a post-Janus world, assuming the court rules against the unions, will view such payments as not delivering any return on investment. In turn, they will stop contributing voluntarily, further degrading the quality of the union’s services.

Even more troubling, if fair share fees are prohibited, resentment and internal strife will arise between those who continue to pay the fees and those who refuse. This would undercut a primary benefit of bargaining — labor peace and a sense of shared purpose.

Speaking as a parent, this raises a serious concern: who wants to send their child to a school where there is an undercurrent of bitterness between teachers and administrators that will certainly carry over into the classroom?

It is easy to see the appeal of those opposing agency fees. No one wants to see more money going out of their paycheck. The union-as-bogeyman mentality is pervasive. Moreover, in my experience, some teachers (especially the newer ones) do not recognize the hidden benefits to bargaining contracts.

But, obvious or not, agency fees help promote a stable workplace that allows teachers to concentrate on their primary responsibility: their students. Removing the key ingredient threatens this balance.

Mark Paige is a former school teacher and school law attorney who represented school districts in New England. He is currently an associate professor of public policy at the University of Massachusetts – Dartmouth.